US Optimism Needs To Be Tempered

Flagging Recovery

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By John Richardson

THE latest US Institute of Supply Management survey signalled a buoyant manufacturing sector, in line with likely Q1 GDP (gross domestic product) growth of 5%, says the latest Weekly Chemistry and Economic Trends report from the American Chemistry Council.

“Consumer spending is expanding and this continued into March as evidenced by light vehicle sales. Moreover, consumers appear to be regaining some degree of confidence,” continued the report.

Light vehicle sales rose from an annualised 10.4m units in the year to February to 11.8m in March with the Conference Board’s latest consumer confidence index showing a strong increase.

But as fellow blogger Paul Hodges points out light vehicle sales were 15-17m per year in 1995-2007.

“With each auto using $2973 of chemicals, according to the ACC, this means the market is currently worth just $35bn versus its peak of over $50bn,” writes Hodges.

And the 162,000 improvement in non-farm payrolls – announced late last week which has contributed to this week’s rallies in equity and crude prices – was placed into context by the excellent Lex Column in the Financial Times over the weekend.

“Recruiting for the census and a rebound from snow-hit February boosted the count, but clearly more people were hired than fired,” writes Lex.

“The problem, however, is that the job market is unlikely to stick to the recovery script from here.

“Natural workforce growth is one impediment, as is return of the discouraged. The broadest measure of unemployment, capturing those who give up or take part-time work, stands at 18 per cent. Moderate economic growth will keep headline unemployment frustratingly close to double digits.

“From where will a strong rebound in demand for US goods and services come? China is tightening and Europe is moribund. US states must rein in spending. Inventory restocking is largely complete, so businesses need higher sales to generate activity.

“Ample spare capacity means industry can survive with little investment. Small businesses, responsible for almost half of recession job losses, need to seek credit from regional banks feeling nervous about commercial real estate exposure.”

Hear, hear. From a chemicals-industry perspective, there’s clearly a risk of mistaking restocking from historically-low inventory levels for a solid recovery.

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